Quality of Earnings Reports Under the SBA SOP 50 10 8.1 Update
The SBA's SOP 50 10 8.1, effective October 1, 2026 and replacing SOP 50 10 8, requires an independent quality of earnings report on initial acquisitions and business expansions when the business purchase price is $3 million or more. The previous SOP had no such requirement, so buyers of larger operating businesses, including many assisted living facilities and multi-site care operators, now face an added layer of review that can change both the timeline and the size of the loan.
A quality of earnings report tests whether a business actually earns what its financial statements say it earns. The reviewer examines revenue, expenses and owner adjustments, separates recurring income from one-time items, and challenges add-backs the seller claims for things like owner salary, personal expenses run through the business or costs the seller says will not continue under new ownership.
The update requires the report to include a cash proof covering the trailing twelve months and the last two fiscal years, which means reconciling the deposits in the business's bank accounts to the revenue it reported. A business whose reported sales do not show up in its bank statements will have trouble getting through that test, regardless of how strong the tax returns or the seller's spreadsheet look.
Lenders have to use the earnings from the quality of earnings report when they calculate debt service coverage, and they must keep the report in the loan file. Because the update also raised the minimum coverage for initial acquisitions to 1.25 on historical cash flow, any add-back the report rejects reduces the loan the business can support, sometimes by more than the buyer expects.
The report sits alongside a separate valuation requirement, since the update requires an independent business valuation from a qualified source when the business price is above $350,000, lets the lender use its own internal valuation on smaller purchases, and caps acquisition debt at the valuation either way. Seller debt that is not on full standby counts toward the cap, so a price that exceeds the appraised value cannot simply be bridged with a larger seller note.
The threshold applies to the business purchase price and leaves out the appraised value of any owner-occupied real estate, so a deal that includes a building needs a clear allocation between the building and the business before anyone can tell whether the requirement applies. Owner buyouts and purchases by employee stock ownership plans do not need the report regardless of price. Ask your lender how it measures the threshold on your deal, especially when the combined price sits near $3 million.
Care businesses tend to raise specific issues in this kind of review, because Medicaid payments that lag, private pay balances that were never collected, owners who worked shifts without drawing a market wage, and facilities kept on cash-basis books all affect what the reviewer can confirm, and each can move the earnings figure the lender relies on.
The report adds both cost and time to a transaction, because a reviewer needs the seller's records, access to bank statements and answers to follow-up questions before the work is finished. Sellers who cannot produce clean records quickly can delay closing by weeks, so the request for documents belongs at the start of diligence rather than after the purchase agreement is signed.
Before you agree on a price, find out whether the business purchase price will reach $3 million and ask your lender who orders the report, who it is prepared for and how its cost is handled. Request two fiscal years and the trailing twelve months of bank statements from the seller early, along with the tax returns and the add-back schedule the seller is using to support the price. If the seller's earnings depend on add-backs that cannot be documented, expect the report to reduce them and price the deal accordingly.
Testing those add-backs yourself before the report is ordered shows you where the earnings are likely to land, which helps you set a price that will hold up once the reviewer is finished. I help business buyers review the seller's financials and add-back schedule before the quality of earnings work begins and model what the loan looks like if the adjustments go against the seller. If you are buying a business priced near or above $3 million, send the financials to amer@awadcapitaladvisors.com, and I can help you see how much of the price the earnings will support.